A major concern in the recent wrangling over the budget deal dubbed the ”fiscal cliff” was cuts in the defense budget – cuts that would have affected not just military personnel, but thousands of civilian employees, contractors and the areas in which they live and work. Those cuts didn’t materialize as expected, although some may still take effect in March 2013 unless more legislation is passed. But these worries underscore the importance of the defense industry to the nation’s economy as a whole, and to investors in particular.

Around the country, military installations feed local economies, as services and support businesses spring up to serve the active duty and civilian employees that staff them. In some areas, a base provides the very reason for a small town’s existence, and creates the backbone of the local economy. Commercial property investing may

flourish in those communities, especially for businesses that offer unique s3ervises geared to the needs of the base.

Likewise, housing near military bases can be a property investor’s dream. Even though base housing is generally available to service people and their families, there may be no vacancies, forcing a newly transferred soldier to rent off-base housing until housing opens up on the base. Not only that, because active duty personnel on short term temporary duty (TDY) assignments that can last no more than weeks or a few months need hosing quickly, rental properties that cater to this kind of renter can nearly always stay occupied.

Civilian employees, too, need housing – and they’re usually not eligible for the base housing that’s usually reserved for active duty personnel. That means either short or long-term occupancy on a regular basis as long as the installation stays at full strength. And while some may choose to buy a home, most don’t, since their assignments can change at any time. Like military personnel, these employees are generally good tenants, with a stable income and credit.

Not only bases but also major defense contractors such as Raytheon have a significant effect on the economy of the surrounding areas, as employees in all capacities look for housing, enroll children in schools and use local services and businesses. This kind of employer hires workers from all parts of the country (and, in some cases, the world), so many choose to rent, at least initially.

When budgets are cut, bases close defense contracts dry up, and personnel are either reassigned or cut. That leaves an economic hole that impacts businesses, schools, and

services of all kinds. And when a local economy falters, so does its housing market. Without jobs to draw new residents, the markets for both commercial and residential property suffer too.

Defense cut have a ripple effect throughout the entire economy, and the housing market is no exception. With cuts still pending and an uncertain future for some markets that have close ties to the defense industry, the military connection that creates a demand for rental housing may scale back or vanish – a good reason to follow Jason Hartman’s advice to diversify investments in as many markets as possible. (Top image: Flickr | NZ Defence Force)